Peter Graham, director at Cardiff-based Stephenson Alexander, has been into the Cardiff investment vault and delved around in the figures to see if history can teach us anything, and he's spotted some interesting facts.
You can read the full analysis behind the bullet points below by clicking through on the "continue reading" link below but here are the highlights. A quick health warning with these numbers. Graham stresses that the figures were put together before the recent, rapid yield compression seen in Cardiff offices market in just the last few weeks.
- Yields and the fall in value are higher today than in 1991, as valuations overheated in 2005-2007
- Property returns were higher in 1991
- Although the base rate was higher in 1991 there was more lending and people took this because proeprty returns were higher.
- Today there's more yield volatily and returns are unlikely to improve
- Invester may have got "scared" by the rapid fall away in the market but they have "short memory" syndrome
- Food store investment still offers a good return for little risk but it can't carry on forever
- Property yields will fall but investors have a resistance to yields and Graham predicts yields going to 5% in the near future.
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Picture from Flickr courtesy of Plindberg http://www.flickr.com/photos/plindberg/ / CC BY 2.0
BY PETER GRAHAM, DIRECTOR AT STEPHENSON ALEXANDER
1991 yields post the January 1990 recession and fall off in value, were generally higher than today. The drop was not as great as this time around because the valuations in 2005-2007 had reached exceptionally high levels. Base rate is much lower now but there is not much funding of course. Base rate was higher then but lending was available. People took up the funding on offer at the time because property returns were higher to compensate.
Coming out of recession in 1991 property returns were higher. We seem to be in a more volatile yield situation now with a huge softening in property yields after the weight of money had driven yields so unrealistically low, where sustainable growth was not there to support those high values and low returns which had little potential for improved performance. Now we are seeing a situation where yields may well reduce by 0.5% over 6 to 9 months, but rents are static having fallen, and again lower yields usually applying as a reflection of the potential for future growth, will not see improved returns.
Comparing sectors, industrial yields are not quite as high as in 1990/1991, certainly prime yields aren't as attractively high. Secondary industrial yields are more in line with the 1990/1991 period reflecting a similar downturn in business performance and profitability and tenant demand. Generally investors have accepted lower returns over the last 5 years than in the previous decade, and this will continue to be the case if yields fall again by 0.5% within the timeframe indicated.
Retail yields are high and prices are likely to rise in this sector with lower initial returns and perhaps little prospect of improving yields or returns on reversion.
The key is the growth investors are going to be looking for from property. Despite the worries the recession has caused, with many investors 'scared' by the rapid fall away in market values, we can see a "short memory" syndrome likely to apply here as investors pay warmer prices and are happy to live with lower returns than historically.
It is foodstore investments that offer a reasonable return for very little perceived risk. Foodstore rents are increasing and foodstore superstore site values. This cannot continue indefinitely. It is surprising that food superstore land values have risen so much in difficult recessionary times. Although everyone has to eat we wouldn't have expected the rise site values that has occurred, to take place this time. Why not in the very buoyant property market of 2005-2007 when people seemed to have more money available?
Expert investors in foodstores seem to have doubts as to whether site acquisitions by the mainstream superstores will continue increasing at the rate we have seen in the last 12 months. Planning being more restrictive will surely slow this trend down, but if there are less sites with planning and highway solutions, then site values will surely increase, whilst the rate of increase and the number of stores acquired, will slow.
Generally food superstore yields are in the 5-6% range and private investors and a few major Funds and other institutions have targeted this sector, where particularly private investors can gear up if necessary with funding available for this sector. We have been involved with several acquisitions on long leases at yields of around 5.5% or just under, with other foodstore investments achieving up to 6% but generally not higher unless secondary stores on shorter leases.
Tesco seems to be regarded as the prime investment covenant followed by Waitrose, J Sainsbury, Asda and M&S. To a lesser extent Aldi and Lidl, despite the latters' increased popularity among shoppers.
Surprisingly investors have a low percentage of their property holdings in foodstores. We can see food superstore investments being very popular for another year or two as the number made available will reduce.
Investors are seeking foodstore investments over a wide area of the UK. Certainly investors do not expect much of an increase in availability of bank funding until the second half of 2010 at least. Better yields should return other investment sectors to popularity when bank finance is more widely available later in 2010.
A high percentage of investors rank foodstore investments as a first priority, and although demand will increase later in 2010, many are keen to buy now.
Yields in other property sectors are unlikely to come down as low as foodstore investments due to lower tenant demand, low rental growth and generally an inferior covenant strength of tenants.
"Whilst property yields will fall, I would expect investors to have a resistance to yields generally going to 5% and under for the foreseeable future even when bank funding improves" said Peter Graham, property investment Director at Stephenson & Alexander.
"We see more and more investors getting ready to acquire and once again they are more likely to react when their confidence has been improved rather than being attracted to buy at the lowest levels of value, which have been reached recently in August."
1991 yields post the January 1990 recession and fall off in value, were generally higher than today. The drop was not as great as this time around because the valuations in 2005-2007 had reached exceptionally high levels. Base rate is much lower now but there is not much funding of course. Base rate was higher then but lending was available. People took up the funding on offer at the time because property returns were higher to compensate.
Coming out of recession in 1991 property returns were higher. We seem to be in a more volatile yield situation now with a huge softening in property yields after the weight of money had driven yields so unrealistically low, where sustainable growth was not there to support those high values and low returns which had little potential for improved performance. Now we are seeing a situation where yields may well reduce by 0.5% over 6 to 9 months, but rents are static having fallen, and again lower yields usually applying as a reflection of the potential for future growth, will not see improved returns.
Comparing sectors, industrial yields are not quite as high as in 1990/1991, certainly prime yields aren't as attractively high. Secondary industrial yields are more in line with the 1990/1991 period reflecting a similar downturn in business performance and profitability and tenant demand. Generally investors have accepted lower returns over the last 5 years than in the previous decade, and this will continue to be the case if yields fall again by 0.5% within the timeframe indicated.
Retail yields are high and prices are likely to rise in this sector with lower initial returns and perhaps little prospect of improving yields or returns on reversion.
The key is the growth investors are going to be looking for from property. Despite the worries the recession has caused, with many investors 'scared' by the rapid fall away in market values, we can see a "short memory" syndrome likely to apply here as investors pay warmer prices and are happy to live with lower returns than historically.
It is foodstore investments that offer a reasonable return for very little perceived risk. Foodstore rents are increasing and foodstore superstore site values. This cannot continue indefinitely. It is surprising that food superstore land values have risen so much in difficult recessionary times. Although everyone has to eat we wouldn't have expected the rise site values that has occurred, to take place this time. Why not in the very buoyant property market of 2005-2007 when people seemed to have more money available?
Expert investors in foodstores seem to have doubts as to whether site acquisitions by the mainstream superstores will continue increasing at the rate we have seen in the last 12 months. Planning being more restrictive will surely slow this trend down, but if there are less sites with planning and highway solutions, then site values will surely increase, whilst the rate of increase and the number of stores acquired, will slow.
Generally food superstore yields are in the 5-6% range and private investors and a few major Funds and other institutions have targeted this sector, where particularly private investors can gear up if necessary with funding available for this sector. We have been involved with several acquisitions on long leases at yields of around 5.5% or just under, with other foodstore investments achieving up to 6% but generally not higher unless secondary stores on shorter leases.
Tesco seems to be regarded as the prime investment covenant followed by Waitrose, J Sainsbury, Asda and M&S. To a lesser extent Aldi and Lidl, despite the latters' increased popularity among shoppers.
Surprisingly investors have a low percentage of their property holdings in foodstores. We can see food superstore investments being very popular for another year or two as the number made available will reduce.
Investors are seeking foodstore investments over a wide area of the UK. Certainly investors do not expect much of an increase in availability of bank funding until the second half of 2010 at least. Better yields should return other investment sectors to popularity when bank finance is more widely available later in 2010.
A high percentage of investors rank foodstore investments as a first priority, and although demand will increase later in 2010, many are keen to buy now.
Yields in other property sectors are unlikely to come down as low as foodstore investments due to lower tenant demand, low rental growth and generally an inferior covenant strength of tenants.
"Whilst property yields will fall, I would expect investors to have a resistance to yields generally going to 5% and under for the foreseeable future even when bank funding improves" said Peter Graham, property investment Director at Stephenson & Alexander.
"We see more and more investors getting ready to acquire and once again they are more likely to react when their confidence has been improved rather than being attracted to buy at the lowest levels of value, which have been reached recently in August."
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